The great gamble of locking up your cash
A new 10-year bond is paying a glittering 4 per cent, but can that rate justify such a long commitment by savers, asks Chiara Cavaglieri
Saturday 23 November 2013
If you're on the hunt for any sign of life in the dead zone that is the current savings market, a new bond paying 4 per cent should offer some hope. Naturally, it comes with a sting in the tail – you have to lock your money away for 10 years – but with variable rates routinely paying a shameful 0.67 per cent, is it a gamble worth taking?
Leeds Building Society's brand-new, 10-year, fixed-rate bond pays eight times the Bank of England base rate, which was dropped down to a low of 0.5 per cent in 2009 and has been stuck there ever since. The last time there was a savings account paying 4 per cent was September 2012 and that was a five-year, fixed-rate bond from Halifax.
For a saver with a pot of £50,000, the monthly income – which is paid into a separate account – Leeds BS would be paying £166.66 (£133.33 after basic tax). The top-paying five-year deal from Tesco Bank pays monthly interest at 3.01 per cent, which equates to £125.41 per month (£100.33 after basic tax).
If income now rather than later is the primary concern, the Leeds bond pays an extra £1,980 in the first five years. If you are approaching or in retirement and so looking for safety, stability and as much money as possible coming in now, this 10-year bond could be a punt worth taking.
Andrew Hagger of the personal finance site Moneycomms.co.uk says: "Understandably, many people feel that 10 years is too long not to have access to their capital, but for those with the sole intention of getting the best monthly income they can from their nest egg, the 4 per cent rate will look very tempting".
The banks and building societies offering attractive rates on the longest bonds are taking calculated gambles that base rate will rise before they come to an end, which will mean they make extra profit. If they get it wrong and rates stay low, however, it is the long-suffering savers who will come out on top. Even when rates do rise, we can reasonably expect it to be a relatively slow process and it seems just as likely that many providers will take their time to pass on the increases to savers.
Mr Hagger points to the 10-year fixed-rate savings bond from Birmingham Midshires, which was launched in the summer of 2008 and, at the time, was thought to be too much of a risk by many people.
"In hindsight the rate of 6 per cent on offer at the time would have turned out to have been a very shrewd move," he says.
Only time will tell whether such a long fix at this rate represents great value, but even the experts and economists don't know with any certainty when rates will rise and this has made long-term fixes tricky to assess.
Ultimately, the decision must come down to your specific needs, but even if you don't need the income now, 10 years is a long stretch. There have been predictions that the first movement in base rate might come as early as summer 2015. If that is the case and rates start creeping up beyond 4 per cent, you could be stuck with an uncompetitive deal for another eight years.
Danny Cox, head of financial planning at Hargreaves Lansdown warns that 10 years is a long time to tie up your savings in cash when life has a habit of throwing curve balls at you, particularly if inflation is eating away at the value of any savings you do manage to grow over that time.
Mr Cox explains that if inflation were to rise above 3.2 per cent for a basic-rate taxpayer, or 2.4 per cent for a higher-rate payer, the 4 per cent on offer from Leeds BS would not be able to keep pace with rising prices.
"The rate on this bond is nowhere near good enough. The probability is that interest rates will rise long before the 10-year term is up and 4 per cent will look even worse value in the future than it does now," he says. "With equity-income funds paying dividends alone of nearly 4 per cent, with the potential for capital growth as well, this is where my longer-term savings are going."
If you are determined to keep your savings in cash, by far the biggest problem is finding a suitable alternative. At present, the average no-notice account pays an embarrassingly low 0.67 per cent, according to Moneyfacts.co.uk. In Isa (individual savings account) territory, the average variable account pays just 1.36 per cent, which only climbs to 1.94 per cent for fixed-rate Isas. Even if you bag the best-buy Isa from Virgin Money (Issue 70), you still earn only 3 per cent, fixed for five years until 2018.
Many current accounts are actually offering better value for savers at the moment. For example, the FlexDirect current account from Nationwide BS pays 5 per cent gross on balances up to £2,500 for the first 12 months (falling to 1 per cent thereafter). Clydesdale and Yorkshire banks pay 4 per cent on balances up to £3,000, although this drops to 2 per cent in March 2015, while the Santander 123 current account, which carries a monthly fee of £2, pays up to 3 per cent on balances of £3,000 to £20,000, 1 per cent on £1,000-£1,999 and 2 per cent on £2,000-£2,999. With all of these, you must either maintain a minimum credit balance to get the interest, or pay in a minimum amount each month.
Independent Partners; request a free guide on NISAs from Hargreaves Lansdown
Britain First criticised for using actress's memory to draw attention to their 'hate-filled home page'
Emergency call 'started off dumb, but got pretty serious'
Mark Dampier: Woodford’s young companies could be the stars of the future
You'll need £220,000 for a minimum wage in your retirement
Questions of Cash: Something rotten in the cellar causes trouble up above
Weekly Money: round-up of the personal finance stories you may have missed 20-24 October
Bank-beating exchange rates on your international payments
- 1 This 'woman calls police to order pizza' story isn't going where you're expecting
- 2 Axe wielding man shot dead after attacking four New York policemen on busy street
- 3 Watch what happened when food critics were unknowingly served McDonald's
- 4 Jimmy Carr's Oscar Pistorius joke goes a bit too far at the Q Awards
- 5 Ottawa shootings: Bruce MacKinnon's cartoon is the perfect tribute to soldier Nathan Cirillo
Of course, teenage girls need role models – but not like beauty vlogger Zoella
Cameron is warned 'no possibility' of UK reducing immigration and that bid to bring in quota on migrant workers would be illegal
Support for EU membership 'at highest level since 1991' with most Brits wanting to stay 'in'
Thousands with degenerative conditions classified as 'fit to work in future' – despite no possibility of improvement
Residents should throw a street party and mix with immigrant neighbours, councils told
Attacks on 'Ukip Calypso' show how skewed people’s priorities are
iJobs Money & Business
£60000 per annum: Ashdown Group: Compensation and Benefits Manager - Compensat...
£30000 - £35000 Per Annum plus excellent benefits: Clearwater People Solutions...
£24000 - £28000 per annum + bonus & benefits: Ashdown Group: IT Business Syste...
£50000 - £90000 per annum + benefits: Ampersand Consulting LLP: Markit EDM (CA...
Day In a Page
This 17th century beauty is full of rustic cosiness, while the detached home office means you can also run a business
This five-bedroom red-brick beauty overlooks the village green and sits in just under two acres of land
Four exclusive apartments in a Grade II-listed former medical school with 2,275 sq ft of living space and 18ft ceilings
A five-bedroom terraced house on the popular Peterborough Estate, ideally located for both Eel Brook Common and South Park
A state-of-the-art farm-building conversion on the former Cliveden Estate, with 11,420sq ft of internal space, cinema and wine cellar
A three-bedroom, 15th-century cottage with original features in the picturesque village of Sissinghurst
A six-bedroom terraced house with large south-facing roof terrace, cinema room and wine cellar
A new seven-bedroom home built in Queen Anne-style with swimming pool and parkland views in Mortimer
A listed, four-bedroom farmhouse in the rural hamlet of Rushall with detached barn, four acres of gardens and paddocks
A first-floor flat with two bedrooms, a spacious reception room and communal grounds in a leafy part of London
A three-bedroom flat with a spacious rootop terrace and balcony, accessed from a private gated courtyard
A Grade II-listed pile with six bedrooms, stables and 39 acres of grounds in Standlake
A two-bedroom flat with boutique hotel-style interiors, close to the foodie haunt of West End Lane
A two-bedroom flat in a beautiful old vicarage, with many original features, close to the city centre
A three-bedroom 16th-century home with an aga kitchen, private gardens and heated outdoor pool, in Hadleigh
A three-bedrom home in sought-after Queen's Gate Mews, with Italian marble-finished bathrooms
Surrounded by glorious countryside in the village of Udimore, sits this impressive four-kiln oast and barn conversion
A five-bedroom house in the picturesque village of Kettlewell, north Yorkshire
An 18th-century former coaching inn with original staircase, open fireplaces and beams throughout
A Grade II-listed Georgian town house with three bedrooms and a south-facing courtyard, near Arundel Castle
Feel on top of the world at this über chic penthouse on the 37th floor of one of Europe’s tallest blocks.
A Grade II-listed Victorian villa with six bedrooms and two further cottages, all with spectacular sea views
A grade II-listed, Georgian cottage with mature 50ft garden, perfect for summer entertaining
A magnificent Georgian pile with turrets, seven bedrooms, a heated pool and four acres of gardens
Fairoak Farm has five bedroom suites, gym, outdoor swimming pool and golf course
Chic two-bedroom river-fronted flat with a private lift that delivers you directly to your home
A spectacular seven-bedroom Tudor pile, once owned by Henry VIII, with 18 acres of land
A seven-bedroom Georgian property previously used as a picturesque wedding venue
A split-level flat in a church conversion with two en suite bedrooms and 1,200sq ft of living space
A three-bedroom bungalow situated behind an impressive stone wall, £645,000
Windsor Castle overlooks this three-bedroom Victorian cottage located on one of Windsor's smartest roads
Chapel House is a former vicarage with nine bedrooms in the beautiful Upper Wye Valley
A five-bedroom B&B and separate owner's accomodation with potential for conversion
Enjoy summer by the Thames in this two double-bedroom converted warehouse in Rotherhithe village
A one-bedroom, luxury apartment with private gym and concierge service in Moorgate
A four-bedroom house in Hermitage Gardens with three reception rooms and landscaped gardens
A seven-bedroom Grade II-listed property with a separate self-contained apartment
A five-bedroom Victorian house with three reception rooms and galleried landing, £695,000
A six-bedroom farmhouse with five acres of land in a former cloth-making village